Bernanke: Rising Incomes Should Counteract Housing Market Slump

WASHINGTON – Rising incomes should support the U.S. economy even as the housing market slows and consumers lose the boost they were getting from home equity, Federal Reserve Chairman Ben Bernanke said in a letter released on Wednesday.

"Rising disposable incomes should enable household spending to expand at a moderate pace and provide continued support for the overall economic expansion," Bernanke said in an August 18 letter to Rep. Ginny Brown-Waite, a Florida Republican.

Bernanke said that should be the case even though smaller gains in home equity would likely lead U.S. households to save more out of their current income.

"The rapid pace of house price appreciation in recent years likely contributed to the decline in the saving rate," he said. "Similarly, the cooling of the housing market and associated reduction in capital gains on housing will probably provide some upward impetus to the saving rate."

The letter was responding to written questions submitted in conjunction with a July 20 hearing on the U.S. economy held by the House of Representatives Financial Services Committee at which Bernanke testified.

Brown-Waite asked Bernanke what impact an increase in the minimum wage might have on inflation at a time when energy prices and labor costs were rising.

"The Federal Reserve is alert to the inflationary forces that you describe," the Fed chief assured her.

He said that while a minimum wage increase would push up labor costs in companies that employed the affected workers, fewer than 2 percent of wage and salary workers were paid at or below the federal minimum wage last year.

"Thus, a modest increase in the minimum wage would likely have only a small effect on labor costs for the economy as a whole and therefore a small effect on overall inflation," he said.